Industries to Watch: Big Box and Department Store Retailers

A credit professional would have to be asleep at the switch to have missed the often negative news coverage about the struggles of Best Buy and JCPenney (JCP). The problems faced by the two companies and others like them make department stores and "big box" retailers part of an industry to watch. As such, creditors are going to need to be mindful of warning signs coming from these businesses and those down the line that rely on them.

JCP's business model, which featured a failed gamble on a campaign that ended faux discounting and coupons in favor of "real" pricing, and Best Buy's struggle to overcome powerhouse online retailers like Amazon and brick-and-mortar competitors like Walmart for market share are the source of their struggles. But an even bigger storm for retailers of this size and profile, as suggested by Bruce Nathan, Esq. of Lowenstein Sandler LLP, potentially looms in the not-too-distant future: rate hikes. Rock-bottom interest rates, and the economic malaise inspiring them, won't last forever. "If your business model is troubled and you have a lot of debt, that's going to be one big issue," said Nathan. "When interest rates go up, the debt has to be refinanced. But a lot of these retail businesses are also badly overleveraged."

And potential financial problems with such businesses could have a domino effect, as many of them serve as anchor stores designed to drive more foot traffic to other retailers in malls and shopping centers. Nathan noted that such a domino effect could also impact a commercial real estate sector that has already seen its share of hardships over the last half-decade. "You need to look for the warnings to be able to mitigate your risk," said Nathan. "You want to be able to anticipate a bankruptcy well before the filing. And there's so much more information out there now that wasn't 20 years ago."

- Brian Shappell, CBA, NACM staff writer

Catch Nathan in Bankruptcy Rumblings: Identifying and Mitigating Risk of a Financially Troubled Customer Headed toward Bankruptcy at Credit Congress on May 22. For more information on the event or to register, visit http://creditcongress.nacm.org/.

Make Better Credit Decisions with Industry Credit Groups

Credit groups are an effective management tool, allowing credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data about the most recent payment practices. The purpose of exchanging information is to help group members separate fact from fiction, so competent and realistic credit decisions about a customer can be made.

Managed and operated by NACM Affiliates nationwide, credit groups:

Provide unparalleled networking opportunities

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Support the discussion of account information and delinquent account reports

Adhere to federal antitrust guidelines

Contact your local NACM Affiliate to learn more about NACM credit groups and to find the group for your industry.

ICC Report Finds Trade Finance Transactions Inherently Low Risk

A new report from the International Chamber of Commerce (ICC) found that banks shouldn't fear financing trade transactions, as this type of business is inherently low risk. The ICC's findings build on a movement worldwide to exclude trade finance transactions from more stringent bank capital requirements, like those in the Basel III framework.

In its recently released Global Risksâ€“Trade Finance Report for 2013, the ICC relied on data from its trade register, an online database of over 15 million transactions provided by 21 banks. The trade finance transactions in the database reflect 60-65% of all global trade finance activity, which is worth about $2-2.5 trillion.

Of the 8.1 million short-term trade finance transactions analyzed by the ICC, data showed that there were fewer than 1,800 defaults among them, amounting to a .02% default rate. For comparison, the default rate for one-year, single A-rated corporate loans is greater than 0.6%, which is nearly 30 times higher than the trade finance default rate. Medium- and long-term trade finance products had a considerably higher default rate of 1.11%, but such financing arrangements are considerably more rare than short-term transactions, some of which only last for 30 days.

Overall, the report provides valuable empirical data for regulators charged with risk-weighting bank assets and stipulating how much capital a bank must hold in reserve for certain types of lending. "I hope that by focusing on the critical connections between default levels in trade finance and the shaping of new regulatory recommendations, decision-makers will be able to engage collectively in efforts to improve the global financial system's overall resilience," said Kah Chye Tan, chair of the ICC Banking Commission and global head of trade and working capital at Barclays.

Trade finance advocates have urged the Basel Committee on Banking Supervision to recognize the lack of risk in the trade finance world and rethink their current approach to establishing a capital requirement threshold for this reliable asset class. Certain portions of Basel III would require banks to hold as much capital in reserve for trade finance transactions as they would have to hold for much riskier forms of financing. This will make trade financing more expensive for the banks and could ultimately force many of them to exit the trade finance business entirely.

â€˘ Basel III and the Impact on Working Capital Requirements, Letters of Credit and Guaranteesâ€˘ Different Security Methods across Europe and Best Practicesâ€˘ Risk Awareness in Today's Global Trading Conditionsâ€˘ Early Warning Signals: Keeping a Pulse on Your Counterpartiesâ€˘ The Effects of Global Instability on the Treasury Department

The Dodd-Frank Wall Street Reform and Consumer Protection Act was so vast a law that it was hard for many people to understand what it entailed. Broadly speaking, however, the goal was to modernize regulations on the financial services industry in order to prevent another economic crisis that motivated the bill's drafting and subsequent enactment.

Recently, however, the regulatory burden Dodd-Frank places on banks received a rash of criticism, particularly in a series of hearings hosted in the House Financial Services Committee's Subcommittee on Financial Institutions. According to witnesses, the law's "one-size-fits-all" approach to regulation, which imposes similar burdens on financial institutions regardless of their size or sophistication, has negatively affected the ability of community banks to serve their business customers.

"Historically, the cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small banks than for large banks. It means more money spent on outside lawyers to manage the risk of compliance errors and greater risk of litigation," said Kenneth Burgess Jr., chairman of FirstCapital Bank in Texas. "All of these expenditures take away from resources that can be directly applied to serving the bank's community."

Burgess noted that regulations were increasing before Dodd-Frank, with more than 50 new rules implemented in the two years preceding its enactment. The law will add hundreds more rules, however, creating a significant challenge for any bank, but especially for community banks which nationwide have a median head count of only 39 employees.

"The more time and resources community bankers devote to compliance, the less time they have to work with their communities to drive innovation and economic growth," said Subcommittee Chair Shelley Moore Capito (R-WV), noting that community banks provide 46% of the financial services industry's small denomination loans to farms and businesses. "These types of loans are often labor intensive and the strong relationships community bankers have with their clients allow them to provide tailored products."

- Jacob Barron, CICP, NACM staff writer

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Credit for Small Businesses Loosening According to Study

The findings of a study released this week by a California-based risk analysis firm suggest that credit lending information is tracking in a positive direction for U.S. small businesses.

In this new study of U.S. bank risk managers commissioned by the Professional Risk Managers' International Association and conducted by FICO, 62% of respondents expected the supply of bank-related credit for small businesses to increase over the next six months. The optimistic view that approval rates for small business loans will remain stable or improve was also shared by 89% of respondents. Additionally, nearly 80% of those polled believe delinquency rates will remain steady or decrease over the next six months.

"In the past, the banking professionals we surveyed haven't been as optimistic about credit for small businesses as they have been for other types of lending," said FICO Chief Analytics Officer Andrew Jennings in the April 16 release. "The upbeat sentiment makes me think it's possible that we'll see small businesses picking up the pace of investing and hiring in the months ahead."

Inability to garner credit has not been the only or even most significant problem regarding small business lending levels. During the lackluster economic rebound, demand has simply been stunted. Though not mentioned by FICO, a factor in the hesitancy to borrow for investments and capital spending stems at least in part from business uncertainty driven by the gridlocked U.S. Congress and White House, which many see more as symbols of inaction and partisanship than as policymakers showing a clear path for what businesses can expect.

Still, the FICO study optimistically predicts a notable increase in demand for credit on the part of small businesses, certainly more than at any time during the past three years.

- Brian Shappell, CBA, NACM staff writer

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U.S. Chamber of Commerce Warns EU on Data Protection Regulation

Regulators have struggled with how to protect personal data in the Internet era. Doing so is no easy task, as laws must tread carefully to keep data safe without impeding its exchange in day-to-day commerce.

The European Union's most recent attempt to walk that line, the General Data Protection Regulation (GDPR), is still being debated, but currently consists of vague proposals to create consistency for businesses and organizations processing personal data in more than one EU member state. Specifically, it would establish a new system of supervision for companies operating in the EU, one based on a single set of rules and a "one stop shop" provision that creates only one data protection authority (DPA) that would be responsible for regulating a company. Each company's DPA would be determined by where the company's "main establishment" is in the EU.

Even though the full extent of the proposal has yet to be fleshed out, its existing proposals and added administrative requirements have already drawn the ire of the U.S. Chamber of Commerce. In a new report, titled the Economic Importance of Getting Data Protection Right, the Chamber and the European Center for International Political Economy (ECIPE) found that, in its current state, the GDPR could have a profoundly negative effect on EU gross domestic product, while undermining any potential benefits of the proposed EU-U.S. free trade agreement.

The report found that if services trade and cross-border data flows are seriously disrupted, EU GDP could fall from anywhere between 0.8-1.3%. EU services exports to the U.S. could drop by 6.7%, and as goods exports are highly dependent on the provision of services, with up to 30% of manufacturing input values coming from services, EU manufacturing exports could fall by up to 11%, depending on the industry. Taken together, these effects could eradicate any benefits born from a new EU-U.S. free trade agreement.

In its report, the Chamber admitted that potential positive effects from the GDPR's "one stop shop" proposal couldn't be predicted, but that consumption of goods and services in the EU would need to increase by 13% union-wide in order to overcome the provision's added administrative burden.

"In today's global economy, it is essential that our governments continue working together to enhance the compatibility of regulations and standards," said Adam Schlosser, senior manager of the Chamber's Center for Global Regulatory Cooperation. "When it comes to the Internet, this report underscores the importance of putting clear, compatible privacy regimes in place that safeguard consumers without unduly impeding the global information flows and data exchanges that fuel innovation."

Click here for a summary of the GDPR's provisions as originally proposed by the European Commission.

- Jacob Barron, CICP, NACM staff writer

Manual of Credit and Commercial Laws, Volume III: Construction Issuesâ€”Do You Have the Update?

New for 2013, language and state laws have been updated throughout the entire volume including:

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Watch for future updates of volumes I, II and IV.

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